What Is Corporate Veil?
Corporate Veil Defined
Corporate Veil is a legal term to describe the protections that business owners have from the liabilities of their business.
Generally speaking, the personal assets of owners for limited liability companies and corporations are immune from contractual debts and lawsuits that may arise out of business operations.
For example, the personal property of a LLC business owner cannot be seized for non-payment of dues to a creditor.
Corporate Veil Made Easy
When courts or debtors hold businesses accountable for their liability, then they are said to be “piercing the corporate veil.”
Examples of instances in which a court may intervene to pierce a corporate veil are:
- If a business does not follow applicable rules and maintain its business in good standing with the state where it is incorporated.
- If a business does not keep sufficient capital to maintain solvency of its operations.
- If a business does not separate corporate identity, or the identity of business as a legal person, from its owner’s identity. An example of this is a business owner mixing personal and corporate identity by using company funds for personal expenses.
- If a business takes advantage of the corporate veil to defraud its shareholders and customers.
Corporate Veil Regulations
Regulation concerning corporate veils differs between states. For example, Florida requires prosecutors to show either that the relevant corporation is an “alter ego” of a parent corporation or that the alleged parent company also engaged in improper conduct in order to pierce the corporate veil. But Nevada has more stringent conditions in the form of a three-part test to establish the “alter ego” condition.
Corporate Veil With Small Businesses
Small businesses are generally more susceptible to having their corporate veils pierced because the distinction between owner and corporation is blurred in their case. That said, courts have taken a conservative view to piercing the corporate veil because it can impede the development of free markets by discouraging businesses from taking risks.